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Really? Asset class returns: http://people.stern.nyu.edu/adamodar/New_Home_Page/datafile/histretSP.html http://people.stern.nyu.edu/adamodar/New_Home_Page/data

Really? Asset class returns: http://people.stern.nyu.edu/adamodar/New_Home_Page/datafile/histretSP.html http://people.stern.nyu.edu/adamodar/New_Home_Page/datafile/... Stocks: 11.53% Ten year T's 5.28% 7% return is easily obtainable. Not guaranteed, but very probable. 50% stocks and 50% bonds, should on average return 8.5% [ This analysis is not inflation adjusted ; average annual inflation is about 3.2% ; subtract this number for "real" returns ]

lotsofpulp 11y ago
Unfortunately, the pension payments are guaranteed, not very probable. I also think this graph is better at showing S&P 500 returns based on buy/sell dates http://www.nytimes.com/interactive/2011/01/02/business/20110102-metrics-graphic.html?_r=0 http://www.nytimes.com/interactive/2011/01/02/business/20110... Since these are also average returns (which don't account for private equity/hedge fund/alternative investments), there are numerous funds that won't get to the average, and end up with a shortfall. Assuming that the return on stock market is the expected return of a pension fund is guaranteed a risk free benefit with a non risk free investment. On the other hand, the federal government requires non taxpayer funded pension plans to use government and highly rated corporated bonds to calculate their expected rate of return, which is far less than the 7% to 9% of government funded pensions.
- tosseraccount 11y ago
  Insured via Pension Benefit Guaranty Corporation, yes. Not quite a "guarantee" of jinormous returns but a certainly a floor. That's a great link. Thanks! Worst case in history was break even after 22 years. Retirement investing should start with a 50 year horizon.
  - lotsofpulp 11y ago
    The PBGC is a joke, ask the pension recipients in this article how it's working out: http://www.nytimes.com/2015/06/18/business/dealbook/kenneth-feinberg-to-oversee-cuts-in-multiemployer-pension-plans.html http://www.nytimes.com/2015/06/18/business/dealbook/kenneth-... Break even does not work for pension funds, they have thousands of people to pay, and as mentioned before, these are benefits sold as being GUARANTEED, as DEFERRED compensation. If these benefits were sold as just another 401k from the beginning, there would not be a problem with riding the market. They were sold as being risk free, written into law as being guaranteed, and therefore do not lend themselves to risk (which, as I said before, is crazy because there is always risk in this world, especially the further you go into the future).
    - tosseraccount 11y ago
      Teamster Pension = Mafia skimming. What do you expect?
      - hga 11y ago
        Indeed; by the time I came of political age in the early '70s, Mafia and insider skimming of Teamster pension funds was notorious, and no doubt one of the reasons the PBGC was established in 1974. People weren't even all that surprised by Hoffa disappearing into thin air/concrete in 1975.
bobcostas55 11y ago
You are making the fundamental mistake of basing the discount rate on the assets used to fund the liability, but the correct discount rate is that of the liability. That rate is the risk free rate. To make the intuition clear: if you were to go to the market and purchase an asset whose cash flows exactly match those of a riskless DB pension, what return would you expect on that outlay? Stock market returns? Of course not, that would represent a clear and huge arbitrage opportunity. The rate of return would be the risk-free rate for that horizon. 30 year treasury bonds earn ~3.1% today.
- tosseraccount 11y ago
  There is no "fundamental mistake". This is the historical average returns for assets classes. It's very imprudent to ride "risk free" for a lifetime. 50% stocks and 50% bonds is a very safe base over time. You should take some risk.
  - bobcostas55 11y ago
    >You must take some risk. DB pensions have no risk at all, tell it to them.
    - tosseraccount 11y ago
      Well, based on this : https://institutional.vanguard.com/iam/pdf/ICRSDB.pdf https://institutional.vanguard.com/iam/pdf/ICRSDB.pdf ( Survey of Defined Benefit Plan Sponsors, 2012) DB plans are about 50% equities ( domestic + international).
    - hga 11y ago
      That would be news to the Pension Benefit Guaranty Corporation (https://en.wikipedia.org/wiki/Pension_Benefit_Guaranty_Corporation https://en.wikipedia.org/wiki/Pension_Benefit_Guaranty_Corpo...), which I'll note was set up in 1974. Yeah, it's for private plans, but no one who's been following current affairs is surprised by what's been happening with government pensions, if you study much economic history you'll know municipalities went bankrupt during the Great Depression, and that the Federal government massive devalued the dollar in the early '30s when it seized all of our gold.

lotsofpulp 11y ago

Unfortunately, the pension payments are guaranteed, not very probable. I also think this graph is better at showing S&P 500 returns based on buy/sell dates http://www.nytimes.com/interactive/2011/01/02/business/20110102-metrics-graphic.html?_r=0 http://www.nytimes.com/interactive/2011/01/02/business/20110... Since these are also average returns (which don't account for private equity/hedge fund/alternative investments), there are numerous funds that won't get to the average, and end up with a shortfall. Assuming that the return on stock market is the expected return of a pension fund is guaranteed a risk free benefit with a non risk free investment. On the other hand, the federal government requires non taxpayer funded pension plans to use government and highly rated corporated bonds to calculate their expected rate of return, which is far less than the 7% to 9% of government funded pensions.

tosseraccount 11y ago
Insured via Pension Benefit Guaranty Corporation, yes. Not quite a "guarantee" of jinormous returns but a certainly a floor. That's a great link. Thanks! Worst case in history was break even after 22 years. Retirement investing should start with a 50 year horizon.
- lotsofpulp 11y ago
  The PBGC is a joke, ask the pension recipients in this article how it's working out: http://www.nytimes.com/2015/06/18/business/dealbook/kenneth-feinberg-to-oversee-cuts-in-multiemployer-pension-plans.html http://www.nytimes.com/2015/06/18/business/dealbook/kenneth-... Break even does not work for pension funds, they have thousands of people to pay, and as mentioned before, these are benefits sold as being GUARANTEED, as DEFERRED compensation. If these benefits were sold as just another 401k from the beginning, there would not be a problem with riding the market. They were sold as being risk free, written into law as being guaranteed, and therefore do not lend themselves to risk (which, as I said before, is crazy because there is always risk in this world, especially the further you go into the future).
  - tosseraccount 11y ago
    Teamster Pension = Mafia skimming. What do you expect?
    - hga 11y ago
      Indeed; by the time I came of political age in the early '70s, Mafia and insider skimming of Teamster pension funds was notorious, and no doubt one of the reasons the PBGC was established in 1974. People weren't even all that surprised by Hoffa disappearing into thin air/concrete in 1975.

bobcostas55 11y ago

You are making the fundamental mistake of basing the discount rate on the assets used to fund the liability, but the correct discount rate is that of the liability. That rate is the risk free rate. To make the intuition clear: if you were to go to the market and purchase an asset whose cash flows exactly match those of a riskless DB pension, what return would you expect on that outlay? Stock market returns? Of course not, that would represent a clear and huge arbitrage opportunity. The rate of return would be the risk-free rate for that horizon. 30 year treasury bonds earn ~3.1% today.

tosseraccount 11y ago
There is no "fundamental mistake". This is the historical average returns for assets classes. It's very imprudent to ride "risk free" for a lifetime. 50% stocks and 50% bonds is a very safe base over time. You should take some risk.
- bobcostas55 11y ago
  >You must take some risk. DB pensions have no risk at all, tell it to them.
  - tosseraccount 11y ago
    Well, based on this : https://institutional.vanguard.com/iam/pdf/ICRSDB.pdf https://institutional.vanguard.com/iam/pdf/ICRSDB.pdf ( Survey of Defined Benefit Plan Sponsors, 2012) DB plans are about 50% equities ( domestic + international).
  - hga 11y ago
    That would be news to the Pension Benefit Guaranty Corporation (https://en.wikipedia.org/wiki/Pension_Benefit_Guaranty_Corporation https://en.wikipedia.org/wiki/Pension_Benefit_Guaranty_Corpo...), which I'll note was set up in 1974. Yeah, it's for private plans, but no one who's been following current affairs is surprised by what's been happening with government pensions, if you study much economic history you'll know municipalities went bankrupt during the Great Depression, and that the Federal government massive devalued the dollar in the early '30s when it seized all of our gold.